The Asia-Pacific private equity market has boomed in the past two years, hitting $125 billion in deal value, following a lacklustre period. Particularly Greater China, India and Australia and New Zealand have seen significant rises, with China hosting a large number of $1 billion+ investments. Private equity players in the region have been actively exiting their pre-2008 stock, which has fallen to an average of 17% of portfolios, while investment rates of return have climbed to a median of around 12%.

Globally, private equity activity enjoyed a boom of activity in recent years. The Asia-Pacific region too has enjoyed rich activity of late, buoyed by high growth rates in the region’s developing economies, particularly China. However, since last year, considerable global and regional volatility has kicked in. China’s economy is in a state of flux, with flummoxed regional investors seeing $5.1 trillion in wealth evaporated on the Shanghai Stock Exchange between mid-June and the end of August 2015. Low oil prices, lower growth prospects, historically low interest rates (that are likely to rise) and fluctuating currencies, provide little room for short term stability.

In a new report from Bain & Company, titled ‘Asia-Pacific Private Equity Report 2016’, the global consultancy explores the state of the private equity market in the Asia-Pacific region, both in terms of the past years as well as the direction the market may take in the coming years.

Another bumper yearUncertainties affecting the region did little to dampen private equity investment activity in 2015. Deal volume was up considerably in 2014 and 2015 on the years previous. 2014 had around 600 deals while 2015 had around 900, while 2012 and 2013 had around 400 deals apiece. Deal value too saw significant increases, mainly on the back of mega-deals, hitting a total of $125 billion in 2015, up from $87 billion in 2014. 2013 and 2012 managed less than half of the transaction value of 2015, at $51 billion and $59 billion respectively.

The number of exits were also up considerably: in total 600 companies were sold for a total value of $81 billion in 2015. The volume and value were down somewhat on 2014, when 800 exits netted $112 billion, although 2015 was significantly better than 2013, when less than 400 deals netted $52 billion.

China boomedThe research further highlights the role Greater China (GC) played in last year’s bumper year. The GC region saw the largest number of public-to-private buyouts last year, the total of which jumped $17 billion – up more than five times on the five-year average, and made up 14% of total private equity deal value in 2015. The GC region saw 154% value growth in 2015 on the 2010-14 average, while it enjoyed a CAGR of 56% on 2014. India too saw activity increase significantly, up 98% on the 2010-14 average and 60% on a year earlier, while Australia and New Zealand saw deal activity up 101% on 2010-14 and 122% on the year previous. Japan and South East Asia both saw substantial decreases in activity on the year previous, with -64% and -34% on the 2010-14 average respectively, and -54% and -44% on 2014 respectively.

Mega deals, those valued at above $1 billion, saw large increases on the year previous. 22 deals at a value of $54 billion were booked, up from 12 deals with $27 billion in value the year previous.

Internet dealsThe researchers also looked at the areas generating the most activity in 2015, in relation to average deal counts between 2010 and 2014. One area of major change, in recent years, is the growing importance of digital technology, which increasingly defines the daily routine in middle-class China and India. Companies offering internet-based solutions are exploding, find the authors, generating a tsunami of interest among private equity funds looking for growth. The investment type last year represented 39% of total volume and 29% of total value. Investors across the region piled a record $36 billion into 371 Internet-related deals in 2015 and another $15 billion into 141 technology companies. Media, healthcare and financial services also drew fresh interest in 2015.

Pre-2008 selloffOn the back of growing capital gains, the number of exits of private equity stock from the pre-2008 era saw a large increase. In 2014 23% of portfolio stock were pre-2008 acquired companies, which dropped to 17% as of mid-year 2015. This is significantly lower than the global pre-2008 stock still creating overhang on portfolios, at around 30%. The unrealised capital of pre-2008 vintage for the Asia-Pacific region saw a significant drop between 2013 and 2015, dropping from $137 billion to $108 billion last year. That, and the industry’s efforts to clean out older deals, actually trimmed the average holding period for Asia-Pacific private equity assets to 4.4 years from 4.8 years a year earlier.

Return on investmentThe management consultants at Bain highlight that funds have enjoyed increased returns on their investments over the past five years. The median return in 2011 was 8.5%, which, over the intervening years, grew steadily to 12% mid-way through last year. The top percentile group managed to generate a considerable margin on their venture(s), finding returns of more than 20% in H1 2015. Even the third-quartile funds performed relatively well in relation to the stock-market, seeing returns of around 5%.

While strong returns have been realised in recent years, the road ahead may be bumpy – the consultancy states that “it is very likely” that returns will come under pressure in 2016 and beyond. Since the projected IRRs for those younger vintages are essentially paper returns, they can change direction very rapidly. Private equity fund returns typically take about seven years to stabilise, and a lot could happen between now and when investors actually see their money. “Slowing GDP growth, chronically high price multiples and interest rates that have nowhere to go but up will only make it harder to produce the IRRs that investors demand of their emerging market exposure. And if the market’s record pile of unrealised capital continues to grow, it will become more and more difficult to make timely distributions”, conclude the authors.

Suvir Varma, who leads Bain's Private Equity Practice in Asia-Pacific, adds: “Last year was an exceptional year for deal-making. By comparison, 2016 will likely be much softer. As the macro story across the region deteriorates, private equity is wading into unfamiliar territory – a slower growth environment that will make it much more difficult to find good companies, improve their performance and exit them at market-beating returns.”